Moving IT forward: insurers' new business/technology partnerships drive information technology investments.

Insurers who outsource information technology today are doing it mostly in the United States, but tomorrow they're likely to move it offshore. Investing in wireless technology isn't a high priority for many insurers today, but before long, a plethora of wireless devices will probably appear. The role of IT in insurance companies is on a forward spin, influencing technology spending.

"This is one of the most exciting times to be in technology,' said Catherine Brune, senior vice president and chief technology officer for Allstate. There's excitement about new technologies and Web services and also about some major trends, including offshore vs. onshore outsourcing of IT functions, managing existing legacy systems, leveraging both Internet and intranet technology and investments in wireless technology. To take the pulse of insurance technology today, Best's Review invited chief information officers and other IT decision makers to identify their top priorities and concerns in a recent online survey.

One of the main forces driving priorities, concerns and their evolution is IT's tighter alignment with business.

Insurers now are looking at optimizing business processes, and they're taking important first steps to apply new technologies that will streamline operations and make it easier for customers, producers and business partners to do business with them, said Faisal Hoque, chairman and chief executive officer of Enamics, a provider of software and services for business technology management, and author of The Alignment Effect." How to Get Real Business Value Out of Technology.

"That's the game changer--common process, efficient operations, limited human touchpoints from the underwriting process to financials--and that's our goal and vision," said Rich Agar, CIO for Overland Park, Kan.-based GE ERC.

Technologists' changing roles are part of the new alignment. "We're no longer the digit heads that only can talk bits and bytes. We're starting to understand the business better and applying new technologies faster to make a greater impact on the business," said Yom Senegor, senior vice president of corporate strategy and CIO for Seattle-based Safeco. The company just completed a strategy to run IT more like a business--a strategy it hopes will cut costs, improve processes and skills, and ensure systems remain up and running.

Some CIOs are even gaining a seat at their company's management table. "IT folks are beginning to move up in class and no longer serving as second-class systems managers or order takers, but actually very trusted partners contributing in business terms to enhance business performance,' said Senegor.

IT/business alignment is also paying off in what many carriers call their bloodline--data. Integrating data is important not only from an analytical standpoint, but also to serve customers better, said Allstate's Brune. Two years ago, Allstate changed its organizational structure and put technology officers into individual business units. "We played with business relationship management, but until you make that part of your business, it makes it very difficult to truly have that partnership. We don't build anything here that we can't use in another part of the company. We go into it thinking how can all of these components be used somewhere else." Allstate has seen development time reduced in many of its projects by 30% to 40%.

Most of insurance IT groups' time is now spent around business/IT alignment to ensure that spending is occurring in the right places, Matthew Josefowicz, manager of Celent Communications' Insurance group said when talking about Celent's 2003 Insurance CIO/CTO survey. In addition, they're making sure this spending supports the overall organizational strategy as opposed to just letting IT make those decisions in a vacuum, he said.

But some experts are more skeptical that IT and business are yet fully aligned. "Even though you hear all the time about alignment, I think it's much further down the road than many think. The trend now is about IT plans being fully integrated with the business plan," said Bill Jenkins, principal and founder of SolvIT Consulting Group LLC in Drexel Hill, Pa.

Through alignment or integration or sheer momentum, IT is moving forward, particularly in areas described below.

Outsourcing Here or There

Outsourcing is on the radar screen of nearly every CIO and IT manager. The topic has even become a hot issue in the upcoming U.S. presidential election.

While some of the campaign ads berate President George W. Bush for moving more jobs offshore, insurers haven't followed suit. The Best's Review survey revealed that 90% of respondents that outsource do so domestically, but many industry experts believe that trend will eventually turn.

Until recently, the insurance industry lagged behind other financial services segments, such as banking, with outsourcing of IT functions. "I think the domestic vs. offshore mix is also indicative of the slower take up of IT outsourcing, in addition to the fact that many insurers haven't taken steps to move the bulk of their IT support to an outside provider," said James Bolton, managing partner for Accenture's North American Insurance Practice. Accenture is a global management consulting, technology services and outsourcing company. "The more you see that happen, the percentage of offshore outsourcing will rise," Bolton said.

Offshore IT spending by North American insurers is expected to increase from $695 million in 2003 to almost $1.5 billion in 2006, according to Celent.

Companies generally gain three major benefits from IT outsourcing: a level of expertise, more skin and a labor arbitrage with cheaper costs, said Gil Irwin, a vice president for Booz Allen Hamilton, a global strategy and technology consulting firm. "You can get the first two of these onshore, but not a cheaper labor arbitrage, so if companies want to get full value of what outsourcing can do for them, they must take at least some of their IT functions offshore."

The move to more off, boring, however, will likely be slow. Even though companies can find some individuals with insurance knowledge offshore, "domain knowledge is important and there are just some things that can't be sent offshore," said Stephen Brobst, chief technology officer for Teradata, a division of NCR Corp.

Insurers are predominately outsourcing software development or systems maintenance, according to the Best's Review survey. "IT is very cyclical with spikes and valleys, and these relationships help us manage those peaks and valleys in our work flow;' said John Golden, CIO of CNA.

While some carriers are beginning to pilot new development outsourcing arrangements, Deborah Smallwood, practice leader for insurance for the research and advisory firm TowerGroup, said they're going with lower priority projects instead of critical projects. This tactical approach may backfire without the right visibility, executive commitment or strong project management for success causing limited benefits gained from outsourcing.

One area that insurers aren't heavily outsourcing is core competencies. "Doing so spells real disaster for companies that go blindly after cost savings without understanding what their core competencies are," said Enamics' Hoque.

Some industry experts anticipate a shift in outsourced functions. System maintenance functions, for example, are increasingly being brought back onshore, while core systems hosting and other nonmission critical functions will likely go offshore, said SolvIT's Jenkins.

Despite the advantages of outsourcing, including overall cost savings, shorter development time, improved systems quality and exposure to IT best practices, some insurers still are concerned about negative impacts outsourcing might have on their companies. Difficulty maintaining morale of IT staff, partners' lack of vertical experience, the inability of partners to deliver, giving up control of resources and the potential instability overseas are some of these potential drawbacks, according to the Celent report.

In addition, some insurers are starting to see the hidden costs, management complexities and communication challenges involved in outsourcing, said Hoque. "These challenges remain the same whether outsourcing is handled onshore or offshore, and that's because companies have yet to maintain alignment internally, across heavily siloed businesses and technology groups, let alone externally with organizations that are structurally different (more or less mature) than their own."

A possible outsourcing backlash may also affect some companies' outsourcing decisions. "This isn't because it's a bad idea, but because it's similar to the Internet bubble that burst," said Judy Johnson, head of the insurance practice group for Sapiens Americas. "People are seeing what they are saying is a good thing, but not looking at the underbelly of what they need to do to make it successful."

"When you outsource, you're collaborating with a partner in business instead of buying a business asset," said Robert Gogel, chief executive of RebusIS, an insurance technology solutions provider. In the era of Sarbanes-Oxley, transparency and security of data related to business partners can be critical issues, he said, and choosing the right outsourcing partner is paramount.

A Legacy of Concern

Legacy systems--and what to do about them--is a problem many experts believe won't go away anytime soon.

Many insurers think their legacy systems negatively impact their ability to conduct business, said Celent's Josefowicz. In Celent's recent report, insurers said these systems are prohibiting work flow improvements, impeding systems integration, slowing product introduction, inhibiting data mastery and causing high maintenance costs.

But it's a mixed bag when it comes to how insurers are dealing with their legacy systems. Nearly 44% of insurers are giving systems a new lease on life by maintaining them and integrating them with newer systems, while 39.1% are evolving to newer platforms, according to the Best's Review survey. Only 17.4% of insurers opt to replace trusted legacy systems.

The concern today isn't so much what to do with legacy systems, but rather the need to Web-enable them to address immediate business needs, said SolvIT's Jenkins. The high cost of replacing systems--a price tag that can run in the tens of millions of dollars--has driven companies to look at other short-term options. "But now CIOs are beginning to discuss putting in place plans to address the legacy system issue from a replacement perspective. You continue to enhance systems, but they don't allow you to get to the data you need, which is a big problem," Jenkins said.

Replacement will likely be slow. According to Celent's survey, 35% of respondents indicated they plan on replacing legacy systems within the next four to six years, while 29% said they are looking to the next two to four years. Only 6% of respondents plan to replace systems between now and next year.

The life industry in particular is not moving to full-scale legacy replacement, said Accenture's Bolton. Companies are more focused on rationalization of platforms and integration, as indicated in the Best's Review survey. However, while it's not yet a trend, there's increased activity in replacement of property/casualty legacy environments. "Underwriting and policy administration solutions are two areas some companies will continue to evaluate," Bolton said. The challenge for companies is that they haven't had a viable option to migrate to build in-house, he said.

Some industry experts believe an answer to extending the useable life and functional value of legacy systems may lie with Web services--a programmable application logic that makes legacy data accessible using standard Internet protocols. It's a matter of using the medium to carry the message, said Dave Pedersen, vice president of Insurity, a provider of property/casualty policy administration and outsourcing services. "As technology continues to evolve, the challenge of disparate and noncommunicative systems is being met by connecting those systems with universally accessible platforms. It's in that way that platforms like Web services are making it possible to share things like legacy data across the enterprise more effectively." Pedersen said that it will be several years before the insurance industry adopts Web services to the point at which companies fully realize the benefits it can provide.

Insurers that choose to develop new systems are likely to do all or part of the work in-house. Most plan either to build new systems in-house or bw or combine with off-the-shelf systems. Only 7% of insurers surveyed said they plan to outsource such development.

Taming the Internet

While the excitement surrounding the Internet during the late 1990s may have subsided, many insurers believe they've yet to feel the medium's full effects.

Insurers' migration onto the Internet is not only creating a lot of value for shareholders and customers, it's also eliminating administrative expenses and improving quality. Some insurers also think it will be a key tool for strengthening technology's alignment with business. "It will become less of a technology issue but more of a pure service outlier, and benefit both the customer and the insurer," said Bob Best, executive vice president and chief information officer for UnumProvident, based in Chattanooga, Tenn. Web-based tools also will help address consumers' increasing demands for self-service capabilities.

The Internet is definitely here to stay, said Accenture's Bolton. "It's becoming more industrialized, and insurers are now trying to harness realistic value of what it provides to them, such as the ability to develop services they can deploy in a more flexible way."

Most insurers now use Internet technology as a sales-support channel, according to the Best's Review survey. All of the hype around the medium four to five years ago was about how insurance is purchased and the validity of the Internet as a direct channel as opposed to the supporting channel it now is, Bolton said. "The ability to deploy Web services to distribution channels and internal organizations and support organization processes like claims and underwriting is here to stay, and when people talk about solutions and the answer isn't Web services, people will ask why," he said.

The survey asked insurers to name the two most important ways they are using Internet/intranet technology. Slightly more than 67% of respondents said they are using it to interface with producers, something TowerGroup's Smallwood said carriers have been doing for the past decade with their intranet Web sites. Carriers are also relying on the Internet and/or intranets for internal business processes (56.5%), to interface with business partners (28.3%), online account services for retail customers (23.9%), to interface with vendors (19.6%), information/referral functions for retail customers (13%) and retail e-commerce capability (13%).

Going--or Not Going--Wireless

Nearly 53% of Best's Review survey respondents said they aren't making or planning significant investments in wireless technology.

Some insurers, however, are optimistic that will change soon. Wireless is the real "hidden gem" for insurers, said Allstate's Brune. "Wireless in the next three to five years will change the way we all work. We hear a lot of people say there needs to be an ROI before they give someone wireless capability. Yet, when you look around, you see everyone working on wireless technology. It's amazing to think about the productivity improvements it provides."

Recent enhancements to wireless applications may also spark insurers' interest. "The technology isn't 'Star Wars' anymore. The price points are coming down and coverage is improving," said Safeco's Senegor. While Safeco doesn't yet use wireless production systems, Senegor believes there's opportunity for its sales force and claims adjusters to benefit from its use. "We're trying to just make sure networks will be robust enough that we can leverage wireless on a national basis," he said.

According to the survey, insurers who are using wireless technology are using it to interface with producers, adjust claims or interface with direct retail customers.

Tomorrow Is Another Day

In the past, IT was largely ineffective for insurers, but the future in the next three to five years is a great one, said CNA's Golden. "We have a tremendous opportunity to do several things for our companies, including helping them with operational expenses, better managing information they have in their hands and helping them make more decisions."

Insurers must address a few issues, however, before forging into tomorrow's technology environment. Whether companies are looking at wireless or Web services, they first need to consider the underlying reason companies across all industries fail to get the value they expect out of technology investments, said Enamics' Hoque. "To date, there has been no structured management approach to aligning business with IT." Other than software development, IT is still run as a series of single tasks vs. an integrated set of end-to-end processes. But in order to create value, companies have to focus on the area where alignment begins--with a management perspective. "We know from business that the best way to create efficiencies is to take a process approach, and the same should apply to the IT function," Hoque said. He said the processes for aligning IT and business need to be at the highest level to improve the strategy, design and control of IT initiatives.

Securing Today, Securing Tomorrow

Security concerns remain top-of-mind for most insurers. But while many chief information officers are worried about disaster recovery, others believe concerns such as privacy will eventually weigh more heavily on their minds.

Nearly 42% of respondents to a recent Best's Review survey of insurance CIOs and other top information technology decision makers cited disaster recovery as the security concern that is most likely to keep them awake at night. Other concerns include hackers and viruses (34.8%), privacy (17.4%) and identity theft and fraud (2.2%).

Some industry experts believe, however, that many insurers can breathe a sign of relief because they already have disaster recovery concerns under control. "Insurers always had very sophisticated disaster recovery plans and they evolved to business continuity plans, and even got more sophisticated with 2000 contingency plans," said Deborah Smallwood, practice leader for insurance for the research and advisory firm TowerGroup. She's now seeing the next wave of operation resilience, which she refers to as organizations' intolerance for nonservice to customers, internal employees and business partners. These efforts are paying off. Last summer's blackout that affected several major eastern U.S. cities is a good example of how insurers' recovery plans helped keep data centers up and running and rerouted call centers with little to no interruption. "As companies continue to build new systems and complicated architectures, disaster recovery plans will become even more sophisticated" Smallwood said.

While some industry experts weren't surprised by the survey results, others, like Smallwood, said they would have expected privacy to top the list of security-related concerns. "It's an indication of how Gramm-Leach-Bliley, HIPAA rules and other laws really haven't hit home in the industry yet," Smallwood said.

Industry experts say the time has come that insurers need to pay even more attention to security concerns around privacy. "It's a costly issue and one that insurers can't ignore" said Bill Jenkins, principal and founder of Drexel Hill, Pa.-based SolvIT Consulting Group LLC. He said life, health and property/casualty insurers all need to fold privacy into their discussions and planning as they move forward. "Otherwise they can easily get caught." While health writers are especially concerned about the Health Insurance Portability and Accountability Act, it also has security implications for property/casualty insurers, he said.

With an Increased emphasis on privacy, security, document retention and internal control regulations, IT organizations are faced with new challenges, said Bob Best, executive vice president and chief information officer for Chattanooga, Tenn.-based UnumProvident. "Four or five years ago, there was less of a business priority around these and other internally-focused areas. Today, IT organizations must absolutely be more proactive about internal types of IT processes and controls as a critical business need."

Having security measures in place is giving some CIOs the confidence to focus more on other things. "We're more concerned around meeting earnings goals," said R. Allen Bowen, senior vice president, information services, for Ohio National Financial Services. He said the company spent a lot of time during the past several years developing a more viable business plan to replace disaster recovery. "That really doesn't work anymore because disaster recovery has the old network mainframe mentality to get systems up, but that's where it stops." He said the lessons learned from Sept. 11 show that companies can "have all the systems in the world" but if they don't have the people behind them, they don't have anything. Insurers are now gearing efforts more around business survival and putting the right application systems and communications architecture in place, while at the same time having adequate staff in the event of a disaster.

Best's Review Technology Survey Results

The insurance technology decision makers who responded to the Best's Review online Technology Survey share common ground.

Emerging Technologies

What are the most important new technologies that you are investing in?

[GRAPHIC OMITTED]

In what areas of wireless technology is your organization making or planning significant investments?

[GRAPHIC OMITTED]

Standards

What insurance industry specific standards
have you adopted in your organization?

AL3            15.8%
AlifE           2.6%
ACORD forms    52.6%
Other          28.9%

Why did you adopt the chosen standards?

Ease of interaction
with business partners    57.1%
Enhanced service
to producers              14.3%
Enhanced customer
service                    8.6%
Efficiency/expense
reduction                 20.0%

Note: Table made from pie chart.

Web Platforms

What is the predominant Web platform used by your organization?

[GRAPHIC OMITTED]

E-Commerce

What are the two most important ways in
which your organization is using
Internet/intranet technology?

Interface with producers            67.4%
Internal business processes         56.5%
Interface with business partners    28.3%
Online account services
for retail customers                23.9%
Interface with vendors              19.6%
Information/referral functions
for retail customers                13.0%
Retail e-commerce capability        13.0%
Other                                8.7%

Security

What aspect of IT security is most likely to
keep you awake at night?

Disaster recovery       41.3%
Privacy                 17.4%
Hackers/viruses         34.8%
Identity theft/fraud     2.2%
Other                    4.3%

How is your organization most likely to
approach the development of new systems?

Build in-house           47.8%
Buy/combine
off-the-shelf systems    45.7%
Outsource
development               6.5%

Note: Table made from pie chart.

Outsourcing

What one or more IT functions does your
organization outsource?

[GRAPHIC OMITTED]

Where are the bulk of your outsourced
functions based?

Offshore    10%
Domestic    90%

Note: Table made from pie chart.

Systems

How does your organization prefer to
maintain existing systems?

Perform in-house    82.6%
Outsource           17.4%

HOW does your organization handle legacy
systems still in operation?

Maintain and integrate
with newer systems        43.5%
Replace                   17.4%
Evolve to newer
Platforms                 39.1%

Note: Table made from chart.